For the record, the Internal Revenue Service will not say whether it is getting tougher on small businesses. Accountants, however, say there’s no question that the agency is stepping up enforcement.

It’s no longer “the kinder, gentler IRS of five-or-so years back,” said accountant Patrick Islip, managing partner of Islip & Co. in Sacramento. “Now the collection efforts are a lot more focused.”

Don Pfluger, a partner in accounting firm Gallina LLP, agreed. “I think they are cracking down a little bit more,” he said. “I think they have come to the conclusion that there is some lack of compliance.”

The IRS defines underpayments as a tax gap — the difference between what the government gets and what it should get. The “gross tax gap” is the amount not paid on time. The “net tax gap” is the amount that is never paid.

For 2006, the most recent year that the IRS has analyzed, the estimated gross tax gap was $450 billion, and the estimated net tax gap was $385 billion. Of that sum, $122 billion was attributed to under-reported business income.

That includes large corporations as well as small businesses, but the bigger the company, the more likely it goes through its own internal audit each year. For publicly traded companies, it’s the law. So for the IRS, small businesses offer richer ground for finding funny business, Plfuger said.

Some types of small-business returns are more attractive targets than others.

“The No. 1 way to get audited is to self-prepare your return on Turbo Tax or Kleinrock or whatever,” said Islip. When the IRS sees that there’s no signature on the bottom from a paid tax preparer, they know there’s no expert to defend the information on the company’s return, he said. That same expertise might pay for itself if the preparer alerts the client to things they missed, such as expensing of capital assets.

The part about the signature may be more of an urban legend, counters accountant James Marta, who runs his namesake firm in Sacramento. But the lack of expertise does raise the odds that the numbers will stick out.

“It’s the same way the Highway Patrol finds you: They look for the one that’s different,” he said. “If you are faster than everyone, you are the one they are going to pick up.”

When a small business files a Schedule C to report a profit or loss, the owner has to list a code for the type of business. The IRS compares the dollars on the return to the norms for that type of business.

“If you are in an industry where everyone has employees, and you use all independent contractors, you stand out,” Marta said.

But a paid preparer doesn’t guarantee a free pass either.

“If you use a lousy tax preparer, and they are known to be a cheater, the IRS will audit a big chunk of that person’s book of business,” Plfuger said. If a preparer suggests some tactics that leave you feeling uncomfortable, it may pay to try someone else.

Someone who files business income (or losses) on a Schedule C is a relatively easy target, Islip said. Making the business an S corporation or limited liability company lessens the odds of an audit. One reason, he said, is that it only takes a few weeks of training for an auditor to be able to tear into someone’s Schedule C and generate some profit for the IRS. Corporate taxes require a higher level of sophistication.

Red flags

Then there are the business sectors that are ripe for auditing because it’s easy to under-report income or over-report expenses.

Construction is one, Islip said, because some companies may pay cash to temporary day workers and not collect Social Security numbers. Also under the magnifying glass are businesses that involve a lot of travel and entertainment, such as real estate sales.

“If you want to beat the audit, great documentation wins every time,” Islip said. “Even if the story is implausible and smells bad, if you have great documentation, you can win — or I can win in your defense.”

For the real estate agent’s mileage deduction, that would include a log of what properties he or she showed, to whom, and when. Tickets to a Sacramento Kings game could be a legitimate deduction if they were to reward a lucrative client.

Foreign transactions are another red flag. Some countries have bank-secrecy laws that make it tempting to stash money in a foreign account and not mention it to the IRS. That could be costly.

“The IRS had an amnesty program so people could disclose without criminal penalties, but that’s all past now,” Pfluger said.

Company cars can be a focus point if they are used partially for personal use.

“If they use it 80 percent for the company’s benefit, the 20 percent for personal use is a fringe benefit, so that’s income,” he said.

Waiting game

If something did get misreported on a business return, the IRS can go back only three years to audit routine items. The state of California looks back four years.

For something beyond a routine error, like failing to mention a big withdrawal from a pension plan or the sale of rental property, the IRS can go back an extra three years.

The best insurance, of course, is to file a clean return in the first place.

“Most of our clients are pretty good. We help them toe the line, and get their toes right up on the line,” Pfluger said. “There’s no chalk on their toes, but there is no space between their toes and the line.”